A substitute product or good is an important term in economic theory. The term refers to a good or product with a positive cross-elasticity of demand, in economics parlance. The term is used by business and economic theorists to make sense of demand and how it affects the marketplace.
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A substitute product, also known as a substitute good, is a good whose demand increases when the price of a similar good increases. Conversely the demand for the good decreases when the price of the other good decreases. In other words, an increase in the price of product A will cause its users to decide to switch to product B as a substitute due to its lower price and similar benefits. Substitute products are bound together, in that customers can trade one good for another if they see fit.
A person who wears eyeglasses has a number of substitute goods he can consider, including contact lens and laser eye surgery, all of which fix a common problem (poor eyesight) with each having their own drawbacks and benefits. A person may also consider artificial sweeteners as an alternative to sugar. You can also find a lot of substitute product choices in the area of medicine, as many companies make variations of the same product, such as aspirin.
Substitutes can be either perfect or imperfect. A substitute product is perfect if the two products can be switched with virtually no difference to the consumer, such as switching Pepsi with Coca-Cola, in that cola consumption would stay the same. An example of an imperfect substitute would be to stop buying gasoline for a car in order to take the bus and save money. The aim would be the same (transportation from one place to another), but the cost, method and convenience would be much different in those cases.
Substitute goods are the opposite of complementary goods, which are goods that see an increase in demand when the price of another good is decreased, or a decrease in demand when the price of the other good is increase. An example of this is hot dogs and hot dog buns. If the price goes up for hot dogs, people will buy fewer hot dogs and also fewer hot dog buns, even if the price of the hot dog buns remains unchanged.
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